Hedge funds’ data provider, HFR writes that hedge funds gained in January to begin 2025 navigating a volatile month, highlighted by the inauguration of Donald Trump as the US President, confirmation procedures of key appointed Cabinet positions, and a wide range of executive orders implementing policy changes across a number of areas including immigration, trade/tariffs, energy policy and spending reductions.
In addition to this, managers also navigated a volatile month in the technology sector, with earnings, capital expenditures and strategic outlooks impacted by intense competition in the AI space driven by the Chinese startup Deepseek, HFR writes.
The HFRI Fund Weighted Composite gained +1.4 per cent for the month, led by the directional HFRI Equity Hedge Index, which advanced +2.1 per cent. The HFR Cryptocurrency Index extended its 2024 surge, adding +0.36 per cent in January on the favourable outlook for cryptocurrency by the incoming Trump administration. The recently launched HFRI Multi-Manager/Pod Shop Index advanced +1.9 per cent for the month as managers navigated policies from the new administration, as well as Technology volatility.
Hedge fund performance dispersion contracted slightly in January, as the top decile of the HFRI FWC constituents advanced by an average of +7.9 per cent, while the bottom decile fell by an average of -4.1 per cent, representing a top/bottom dispersion of 12.0 per cent for the month. By comparison, the top/bottom performance dispersion in December 2024 was 13.2 per cent. In the trailing 12 months ending January 2025, the top decile of FWC constituents gained +41.4 per cent, while the bottom decile declined -9.9 per cent, representing a top/bottom dispersion of 51.3 per cent. Nearly eighty per cent (80 per cent) of hedge funds produced positive performance in January.
HFR unveiled an expansion of its HFRI, HFRI 500 and HFRI 400 index families, launching new indices delineated by fund liquidity. The new composite and strategy-level indices are split into two liquidity categories: one for funds with monthly (or more frequent) liquidity, the other comprised of funds offering less than monthly liquidity (quarterly, etc.). The purpose of the new indices is to empower investors by offering hedge fund benchmarks that more closely resemble the liquidity characteristics of their underlying hedge fund or other alternative asset portfolios.
Equity Hedge (EH) funds, which invest long and short across specialised sub-strategies, extended 2024 leadership with a strong gain to begin 2025 while navigating both new policy and technology sector volatility, with the HFRI Equity Hedge (Total) Index advancing +2.1 per cent. EH sub-strategy gains were led by the HFRI EH: Multi-Strategy Index, which surged +3.6 per cent for the month, the HFRI EH: Fundamental Value Index, which jumped +2.8 per cent, and the HFRI EH: Quantitative Directional Index, which added +1.65 per cent in January.
Uncorrelated Macro strategies also advanced in January to begin 2025 as interest rates fell while commodities gained, with the HFRI Macro (Total) Index adding +1.0 per cent in January, while the HFRI Macro Asset Weighted gained +2.0 per cent. Macro sub-strategy performance was led by the HFRI Macro: Multi-Strategy Index, which jumped +2.5 per cent, and the HFRI Macro: Discretionary Thematic Index, which added +1.6 per cent for the month.
Event-Driven (ED) strategies, which often focus on out-of-favour, deep value equity exposures and speculation on M&A situations, also gained in January as recent policy changes have increased expectations for a strong M&A cycle in 2025. The HFRI Event-Driven (Total) Index advanced +0.9 per cent for the month, led by the HFRI ED: Activist Index, which jumped +2.4 per cent, and the HFRI ED: Credit Arbitrage Index, which added +1.95 per cent in January.
Fixed income-based, interest rate-sensitive strategies produced another gain as interest rates declined despite significant gains in the US Dollar, with the HFRI Relative Value (Total) Index gaining an estimated +0.8 per cent for the month marking the Index 15th consecutive monthly gain and 27th gain in last 30 months. RVA strategy performance was led by the HFRI RV: FI-Convertible Arbitrage Index, which advanced +1.3 per cent for the month, followed closely by the HFRI RV: Multi-Strategy Index, which added +1.2 per cent.
Liquid Alternative UCITS strategies also gained in January, with the HFRX Market Directional Index gaining +2.35 per cent while the HFRX Global Hedge Fund Index advanced +1.0 per cent. Strategy gains were led by the HFRX Equity Hedge Index, which gained +2.1 per cent.
“Hedge funds posted gains to begin 2025, effectively navigating a challenging environment dominated by volatility in the technology sector, as well as announcements of executive orders and implementation of new policies effecting a wide range of industries including trade/tariffs, immigration, energy and many others. Despite the volatility, directional Equity Hedge strategies led broad-based strategy gains for the month, with contributions from Fundamental, Quantitative and Shareholder Activist sub-strategy exposures,” says Kenneth J. Heinz, President of HFR.
“Many financial market risks have shifted and evolved but not fallen, with geopolitical risk shifting from election outcomes and military conflicts to policy changes and conflict resolution; inflation and interest rate risks remain, while expectations for continued growth in AI-fuelled large cap technology are in some cases tempered by high capital expenditures and intense global competition. Managers have been positioning for this dynamic environment for several months, with intensive positioning since the US election in November, and it is likely that managers are positioned for acceleration of these policy changes throughout 1H25. Investors are likely to increase allocations to managers which have effectively demonstrated their strategy’s specialised ability to navigate these policy changes and rapidly shifting market cycles which create both risk and opportunities.”
